Is style drift informative? Evidence from mutual funds in China

Abstract

In this study, we investigate whether the style drift of portfolio managers is informative. We establish that style drift is based on public information rather than the imitation of peers. Fund managers are found to adjust their portfolios to align with market expectations, particularly in normal market conditions. However, we observe a pronounced shift towards irrational herd behavior during market turbulence and style rotation periods. While style drift can offer benefits in contemporary periods, such as positive risk-adjusted returns, the funds that exhibit excessive drift can hardly beat their peers in subsequent periods. More notably, sophisticated investors tend to abandon funds with more considerable style drift in favor of those adhering to a consistent investment strategy. Our findings indicate that while style drift may be a strategic response to market conditions, its advantages are transient and often unaligned with the preferences of sophisticated investors.